New decision from the US Federal Reserve: no interest rate cut expected

If the central bank does not change interest rates again – as analysts expect – the policy rate would remain within a range of 5.25 to 5.5 percent. This is the highest level in more than twenty years. Commercial banks can borrow central bank money at this rate. It would be the fifth time in a row that the Fed has left the policy interest rate unchanged at this level. At the same time, inflation in the US appears to be persistent.

At the last meeting in late January, Federal Reserve Chairman Jerome Powell made it clear that current interest rate levels had “likely peaked” and that rate cuts could be expected this year. At the same time, he tempered expectations that the Fed would cut rates at its March meeting. They first want to wait and see how inflation develops.

Consumer prices rose in February

Consumer prices have risen much more slowly recently than a year ago. However, new figures from the US government show that price inflation in the US has unexpectedly accelerated somewhat. Consumer prices rose by 3.2 percent in February compared to the same month last year. Analysts on average had expected an unchanged rate of 3.1 percent.

The US Federal Reserve aims for price stability of 2 percent in the medium term. Keeping inflation under control is the classic task of central banks. Since March 2022, the Fed has raised its key interest rate by more than five percentage points at a record pace in the fight against inflation, but recently stopped turning the rate screw and left rates at high levels.

Inflation due to energy prices

The rapid inflation was partly caused by the rise in energy prices after the Russian attack on Ukraine and the consequences of the corona pandemic. The U.S. inflation rate was all-time over 9 percent in the summer of 2022, the highest in about four decades.

The Fed will also release new forecasts on Wednesday. In December, Fed policymakers expected an average policy interest rate of 4.6 percent this year. That indicated about three rate cuts in 2024. It will now be interesting to see whether the Fed will stick to this forecast – or, given persistent inflation, expect smaller rate cuts this year. Some analysts expect a first rate cut only at the next meeting in June, others only at the meeting at the end of July.

A good economy reduces the pressure to lower interest rates

It is important that the Fed finds the right balance. Because if interest rates are too high, there is a risk of a recession. As expected, the Fed’s rapid rate hikes had dampened growth in the largest economy. But the US economic figures have positively surprised economists – and probably also central bankers.

The good economic data reduces pressure on the Fed to cut rates quickly and significantly. The ‘New York Times’ calls the central bank’s approach a ‘so far unexpectedly painless process’. “It is increasingly likely that central bankers will not cut rates at all this year,” the newspaper quoted analyst Joseph Davis of asset manager Vanguard. (sda/dpa)